New approaches to reforming the international aid system

Eamon Cassidy - Head, Development Relations Department, Department for International Development

Chair:

Alison Evans - Director, Overseas Development Institute

Description

Aid is not the most important determinant of how quickly a country develops, but it can contribute both to accelerating development and improving the lives of poor people. There are mounting concerns however that not enough is being done to ensure aid is used effectively for poverty reduction. Despite decades of commitment to change how aid is delivered, reform has been painfully slow. Declarations of intent have clearly not been sufficient to overcome the political and institutional incentives and constraints within which donors work. A key question, looking to the future, is this: are donors more likely to be able to change the constraints in which they have to operate, to become more effective within the existing system?

This meeting explored new thinking on institutional incentives and constraints in the aid system - the political economy of aid. Owen Barder (Development Initiatives) presented his new paper titled `Markets, Networks and Planning for more Effective Aid` which suggests a combination of institutional changes, drawing on markets, networks and planning to implement a new aid reform agenda. A discussion panel of international experts chaired by Alison Evans, Director of ODI, contributed thinking on underlying principles and set the scene for wider discussion.

Alison Evans opened the meeting by introducing Owen Barder, Director of Aidinfo.org, who presented his paper ‘Beyond Planning: Markets and Networks for Better Aid’. Roger Riddell, Non-Executive Director, Oxford Policy Management and Eamon Cassidy, Head of Development Relations Department, DFID acted as discussants.

Owen Barder, Director of Aidinfo.org

Owen’s Motivation for writing this paper was to explore a set of underlying issues in the aid industry.

Why is aid reform so slow?

Where are we going after Paris and Accra?

What should International Organizations do?

Why can’t we convince people that aid works?

Owen started by comparing the role of an aid agency to that of a missionary. Aid agencies act as intermediaries between the donors and the intended beneficiaries. They contribute towards reducing transactions and information costs by managing the challenges of incomplete and asymmetric information. They not only mediate between thecompeting interests of donors and recipients but in doing so achieve returns to scale. They are instrumental in aligning the interests of donors and recipients.

Owen’s main argument is that the existing political equilibrium between donors and recipients is unsatisfactory. The solution is not to change this existing equilibrium but to move to a new one by changing the determinants of the equilibrium. . The incentives which drive aid agency behaviour are a consequence of the international environment and technology, and they can be changed by an appropriate combination of well designed structural changes.

He attributes the problems present in the aid industry to challenges of political economy of aid.

Political economy of aid suffers from imperfect and asymmetric information, especially from broken feedback loop. Lack of pressure to improve results in high transaction costs and poor quality of activities.

Donors have diverse objectives which are often in conflict with each other. This results in donor proliferation and has negative impact on accountability.

Donors and implementers usually have different interests and opinions which lead to what economists call the principle-agent problem. This is a result of proliferation and the focus tends to shift on inputs rather than results.

Proliferation by donors also leads to collective action problems as no one is willing to assume responsibility. This exacerbates negative spill-overs and increases coordination costs.

In order to improve the global governance of aid, Owen advocates greater reliance on planning, market mechanisms and networked collaboration.

While planning is central to development thinking and is a possible solution for the collective action problem, there are several problems associated with it:

There is no defined leadership.

Information needed for good planning is not available.

A growing number of actors exacerbate the proliferation of aid agencies.

There is no evolution in this system i.e. it is a static model.

A market mechanism is good for evaluating costs and benefits of different choices, enabling decentralized decision making, are evolutionary and provide incentives to all actors, but a unique problem with a market for aid is a lack of a price signal. Additionally, there is divergence between consumers (donor country taxpayers) and the actual beneficiaries and without any intervention markets alone cannot solve the problem of externality.

The final mechanism is networks, which works on the principle that people can collaborate and do things for non-monetary reasons. Though networks promote decentralized decision making and information sharing, they cannot work if people have diverse objectives.

The crux of Owen’s analysis is that none of the three mechanisms acting alone can solve the problems of aid industry, but together they can be effective in addressing the challenges of political economy. His vision for aid system is a collaborative market which draws on the different strengths of planning, markets and networks paradigm to create an institutional environment for the aid system and promotes evolution towards greater effectiveness.

Discussants

Roger Riddell, Non-Executive Director, Oxford Policy Management was then invited by Alison to present his views on Owen’s paper.

Roger started by giving 5 reasons why Owen’s paper is worth reading

It blends support for aid with the analysis of some major problems that aid has;

It focuses on the political economy;

It discusses and analyzes aid through the prism of institutional economics;

It puts up a convincing case why the donors should pay attention to the ideas in his paper;

It focuses on the importance of the aid recipient.

Roger’s initial concerns related to the terrain of political economy. The internal incentive structure and dynamics within an aid agency limit the scope of the analysis and political economy analysis of aid needs to embrace not only what is happening within aid agencies but outside as well. His reasoning is that the root of aid problems is located not in the agencies that provide aid but at the door of their masters.

His second question is how and why donors should move to a collaborative market when for decades many of them were reluctant to do so? The paper does not sufficiently spell out the process through which aid agency might persuade the donors to do so.

Surprisingly, papers recommendations are donor focused even though it lays emphasis on the central role of recipients. According to Roger, donors need to help build and strengthen the capacity of developing countries to act as regulators to help the market to work more efficiently.

Lastly, Roger discusses 3 of the recommendations made in the paper:

‘Mechanisms for beneficiaries to provide feedback’: Roger feels that paper refers to beneficiaries in terms of service delivery, but today a larger portion of aid is given into the government system for building capacity of both the government and the civil societies.

‘Funding for international organizations delinked to results’: The paper’s focus on funding by results raises is worrying as outcomes are attributable to a whole range of developmental efforts by the recipient government and not aid alone.

‘More independent, transparent and rigorous evaluation of aid interventions’: Roger agrees with this recommendation but feels that priority should be given to issues like:

Building capacity of the recipients to undertake their own evaluations

Need for recipients to lean on donors and encourage them to adopt a far more critical and less defensive attitude to evaluations.

Eamon Cassidy, Head of Development Relations Department, DFID, was invited to share his views on the paper.

Eamon started by discussing recent developments in DFID regarding evaluation techniques, creative ways for closing the feedback loop and making multilaterals effective, before progressing to comment on Owen’s paper.

He highlighted Owen’s analysis of political economy particularly on the diverse objectives of donors misses out an essential fact that partner governments also have diverse objectives. The proliferation problem exists because governments are not confident enough to say no, as donors have yet to adhere to their commitments. This particularly is reflected in the unpredictable nature of aid.

Eamon points that for aid dependent countries the best form of aid is the one that goes through government system. By advocating sub-contracting, Owen might be misinterpreted as offering comfort to those who do not want to move to more effective aid delivery mechanisms and think that less effective forms of aid can be made better by adding another layer of bureaucracy to it.

On Owen’s suggestion to move to ‘cash on delivery aid’, Eamon again warns against misinterpretation that aid should go to easily quantifiable outcomes, when in reality the best outcomes are often hard to measure. Therefore, there needs to be a clear signal of donor objectives to partner government.

He stressed that we are moving towards achieving the right balance of power through experimentation and MDG contracting where 30% of Budget Support is conditional on meeting targets while rest of the 70% is not. Moving the balance beyond this spells greater risk on partner governments, which is not acceptable.

He concluded by saying that greater donor harmonization and Budget Support have not increased the powers of donors in relation to that of partner governments but have simply made it more explicit.

Key points raised in the discussion included:

How would you address the critic that aid undermines aspects of governance and markets?

Increasing monitoring particularly independent monitoring might lead to greater proliferation of agencies employed for survey. Also what are your views on long term planning and exit strategies of aid agencies?

What is the consequence of uncontrolled aid on recipient country?

These questions were jointly answered by Owen and Roger. Owen started by pointing to Paris and Accra objectives of shifting power between donors and recipients. He supports these efforts, but feels that the goal cannot be achieved by simply making policy announcements. He also acknowledges the fact that by reducing conditionality donor interest in giving aid also falls. The essence of the problem is to make the shift in power more palatable to people who are giving aid.

He then moves on to addressing the issues raised about evaluation. The present procedure for evaluation is second to the first best option of directly seeking feedback from the beneficiaries. He asserts that the aim should be to empower the beneficiaries so that they can tell us what’s working and what’s not.

Roger addresses the issue whether aidundermines the markets and governance. He begins by reflecting on the instances where this has been the case and where it hasn’t. But overtime greater proportion of aid is being given for proper functioning of the markets and for building strong governance in recipient countries.

Roger also addresses the problem of proliferation by NGO’s in the developing countries. He states that the challenge is to open up space for civil society organizations to operate. But there is a risk that some of the civil societies are more politically inclined than the others. There is evidence to show that sometimes bilateral agencies don’t understand sufficiently about the dynamics of civil society in countries where they have budgets and are giving funds to civil society.

How much of the change you advocate will be forced on the political economy of aid? Where does the pressure come from?

In empowering recipients in evaluation process we might be in danger of raising another set of challenges for political economy.

Owen started by addressing the first question to which he said that it will be ideal if the pressure for better aid comes from the developing countries, but some of the pressure has to come from donor countries as well. We cannot entirely rely on the imperfect systems of feedback, accountability and politics in developing countries to do that for us.

On addressing the second question, Owen argues a bottom up evaluation techniques have developed in other public management systems and the aid industry could make use of these advances. He concludes by saying that aid industry is still in 1970s cooperative planning mindset and that the teachings of public management have passed through it.

Eamon spoke on the issue of linking aid to governance to which he warned that democracy particularly in fragile states has to develop in an organic manner and donors should not try to impose their ideas through aid. Donors must be careful that aid does not provide a disincentive in developing revenue systems in recipient countries as domestic accountability is fostered best when people pay revenue into the government system.

Before concluding, Roger pointed out that infrastructure and technology for enabling voices from south to be heard is available and only political will is needed to engage the south in all the debates about aid and development.

Guest presenter Alison Evans, Director of ODI, interviews Owen Barder about his new paper, Beyond Planning: Markets and Networks for Better Aid, and Roger Riddell, author of two key books on aid and a non-executive director of Oxford Policy Management